I went to a very interesting meeting yesterday at which Joe Brown, founder of Milestone Mortgage, who walked us through the start and what he sees as the finish of the current lending crisis. The following comes from notes I took.

After the crash of the tech sector and 9-11, our economy was in a world of hurt. The Fed started cutting the discount rate and continued cutting until the discount rate came down over 5% over a relatively short period of time. What resulted was more people buying homes as the cost of money was less expensive.

Out came home buyers ? they were just about everywhere. The cost of money was low and some lenders saw an opportunity that looked too good to be true. Not only were buyers everywhere, but they were driving up the price of homes in many markets around the country. What came next was a gap. Prices were skyrocketing while wages were relatively stable.

Lenders saw another opportunity ? home equity loans. In markets where home prices were going up in excess of 25% a year, people who bought homes saw the value of their homes 50% or more higher. Many saw the ease of getting home equity loans as a means to pay off credit card debt or invest in rental property or even buy a boat or a new car for cash. Can you smell what was over the horizon yet?

Builders were putting homes up all over the place. Lenders once again saw a huge opportunity to make money. They started loosening their standards for lending. No job? No savings? Need a house? No problem! Stated income loans, no money down loans, creative 100% financing, adjustable rate loans, interest only loans, 40 year loans ? you name it, someone had it. See any problems yet?

In 2004, 69% of Americans owned a home. This was the highest rate of ownership ever. Here is a hint to the first of many problems. Although mortgage bankers have quite a bit of regulation from federal and state authorities, mortgage brokers had very little oversight. These creative loans, which probably should never have been made, were bundled the loans and sold to investors. Although I stated that mortgage brokers aren't very regulated, they were not the only problem. If there weren't lenders to provide these loans, the brokers would have no place to go. Greed got the best of many people. Not a lot of people are paying the price. One really nasty result is someone going to the closing table and finding out that their source of money dried up overnight.

All of a sudden, certain markets stabilized. Then they went backwards. The bubble burst. Markets in California, Arizona, Colorado and Florida saw housing prices decrease. Not only did the drop, but they dropped like rocks in some areas. With houses not worth as much, the creative loans were worth less. Lenders couldn't sell their bundled loans for the value of the loans. Lenders were selling loans at a loss ? they owed money at closing. This was the cause of the collapse and lenders started going out of business. The media got wind of all of this and made it look like we had a national disaster on our hands. Enter the truth. Of the approximately $10 trillion of mortgage debt in our country, only a small amount is affected. Of the 6,000,000 buyers who had bought during this creative lending period, only around 15% were affected by the bad lending practices.

Is the crisis over? No, it isn't. There will be more lenders going under and more foreclosures in many markets. However, our economy is very strong. We have low unemployment and strong job growth. Many economists see the U.S. getting through this difficult period just fine.

Private equity is flowing into the troubled lending industry. Countrywide got a $2 billion infusion from Bank of America. The Fed is staying out of this except to drop the discount rate slightly. That is a very good thing. If we got involved in a Federal bail-out like back in the 80s during the S&L crisis, it could lead to inflation, which could lead to a recession.

So what's up now for borrowers? Those with bad credit, little or no income and no savings probably won't be buying houses. People who can put 20% or more down and who have good credit will continue to get loans. Markets will correct and investors will go in and start buying 'cheap' properties. Homes will once again be affordable for regular home buyers as well.

By the way, just because the media has made the national housing market look like it is in terrible shape, it isn't. As a whole, it isn't healthy, but pockets are doing great. Many markets, like Austin and San Antonio, are quite healthy even now and they look to remain so.

What it looks like is that we have another 6-9 months of problems before many markets turn around. Will it all be roses after that? Probably not, but we won't be feeling so much pain.

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